Oct. 3 (Bloomberg) -- Treasuries fell on expectations the U.S. House of Representatives will approve a $700 billion financial-rescue package, easing demand for the safety of government debt.

Bonds slumped for the first time in three days earlier as traders said September's decline in U.S. payrolls wasn't as large as some estimated. At least 24 House members said they will drop their opposition to the rescue bill, which failed by a dozen votes on Sept. 29. The House roll call was scheduled for early this afternoon.

``Slowly the news comes out that the bill is likely to be passed,'' said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas Securities Corp., one of 17 primary dealers that trade with the Federal Reserve. ``The market will be pricing in that effect, which will be higher stocks and lower bonds.''

The yield on the two-year note rose 14 basis points, or 0.14 percentage point, to 1.75 percent at 12:30 p.m. in New York, according to BGCantor Market Data. The price of the 2 percent security due in September 2010 fell 9/32, or $2.81 per $1,000 face amount, to 100 15/32. Ten-year note yields advanced 8 basis points to 3.71 percent.

Two-year notes are still headed for a sixth week of gains on speculation that frozen credit markets will prompt the Federal Reserve to reduce interest rates to prevent a recession.

Libor Soars

Money-market rates jumped to records. The London interbank offered rate, or Libor, the rate banks charge each other for three-month dollar loans, climbed for a fifth day. It reached 4.33 percent, the highest since Jan. 10, data from the British Bankers' Association showed.

The difference between what banks and the Treasury pay to borrow for three months, the so-called TED spread, widened to 3.84 percentage points, the most since Bloomberg began compiling the data in 1984.

California Governor Arnold Schwarzenegger told the U.S. Treasury that his and other states may need emergency federal loans if credit-market turmoil continues to impede their access to financing. The crunch ``has the power to grind the U.S. economy to a halt,'' he e-mailed Treasury Secretary Henry Paulson last night, Treasury spokeswoman Jennifer Zuccarelli said in Washington today.

Rate-Cut Bets

Futures on the Chicago Board of Trade show an 80 percent probability the Fed will lower its 2 percent target rate for overnight lending between banks by a half-percentage point at its Oct. 29 meeting, and 20 percent odds it will reduce the rate a quarter point. Traders saw no chance of a cut a month ago.

The House cleared the way to complete action on the Senate- passed $700 billion financial-market rescue package that was refashioned to entice enough votes for passage. The chamber voted to prevent members from offering amendments that could snarl the proceedings.

The package authorizes the government to buy troubled assets from financial institutions rocked by record home foreclosures. The legislation also includes $149 billion in tax breaks, a higher limit on federal bank-deposit insurance and a change in securities laws.

``It's wide open what happens'' after the vote, said Carl Steen, a market analyst in New York at MFR Inc., an economic consulting firm.

Treasury yields should rise as the market begins to consider how much the U.S. will have to borrow to rescue financial firms, Steen said.

High Volatility

Payrolls' loss of 159,000 jobs was the most in five years, a Labor Department report showed. Analysts surveyed by Bloomberg News had anticipated a drop of 105,000. The jobless rate, the last one reported before the presidential election, remained at 6.1 percent. Hours worked reached the lowest level since records began in 1964.

``People were expecting a worse number,'' said Donald Ellenberger, who oversees about $6 billion as co-head of government and mortgage-backed securities at Federated Investment Management Co. in Pittsburgh. ``Even though the Bloomberg consensus was down 105,000, the whisper number was worse than 105,000.''

Some traders anticipated payroll cuts reaching as high as 175,000 or 180,000, according to Michael Franzese, head of government-bond trading for Standard Chartered in New York.

A measure of price swings was near an all-time high. Merrill Lynch & Co.'s MOVE Index, an options-based gauge for Treasury volatility, rose to 206.7 on Oct. 2, near the 208.5 reached Sept. 30, the highest since it was created in 1988. The latest reading means traders expect a yield range on Treasuries of 206.7 basis points on an annualized basis in the coming month. That's almost double the level of 105.9 a month ago.

``We'll see extremely tight conditions in the money market through the end of the year,'' said Vincent Boberski, senior vice president of portfolio strategies at FTN Financial in Memphis. ``It's difficult to see the short end of the curve giving back a significant amount.''

To contact the reporters on this story: Dakin Campbell in New York at dcampbell27@bloomberg.net; Liz Capo McCormick in New York at Emccormick7@bloomberg.net